Assume that a driver faces the following loss distribution:
Loss 10,000 0
Probability .04 .96
These two drivers decide to pool their losses with two otherdrivers with the same loss distribution, and all losses are notcorrelated, i.e., independent.
6. What is the expected loss for each member of the pool?
7. What is the standard deviation of loss for each member of thepool?
Now consider another group of four drivers who have formed aseparate pool, and who each have this loss distribution( beforepooling):
Loss
15,000 10,000 0
Probability
.01 .05 .94
8. What is the expected loss for each member of this new pool offour drivers (after pooling)?
9. What is the standard deviation of loss for each member ofthis new pool (after pooling)?
10. If all 8 drivers decide to pool their risks, what would theexpected loss for each member of this pool of eight drivers be?
